Question 3 (a)
Block of buildings: depreciation and capital gain when one building is sold and another bought (as set, 1961 Act, AY 2019-20)
4 marks
- Time to write
- About 8 minutes
From an older CBCS paper
Question
Question 3 (a) · 4 marksSuresh owns two buildings, both used by him for his own business. These buildings have a written down value of ₹ 15,00,000 as on 1.4.2018, and the rate of depreciation allowed on this block is 10%. On 1.12.2018 he purchased another building for ₹ 25,00,000, and on 1.3.2019 he sold one of the two old buildings for ₹ 18,00,000. Transfer expenses amounted to ₹ 20,000.
For the assessment year 2019-20, compute the allowable depreciation/ taxable capital gain. (4)
Paper note: The as-set version: set and answered under the Income-tax Act, 1961 for assessment year 2019-20 (previous year 2018-19), with the dates as printed.
Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- computeHead by head: each income under its head, exempt items marked exempt, then the deductions and the tax.
Write it in this order
- Read the data; note exactly what is asked 1 min
- 1 Written down value of the block 1½ marks 3 min
- 2 Depreciation at half rate on the new building 1½ marks 2 min
- 3 No capital gain under section 50 1 mark 2 min
Try it first. About 8 minutes for 4 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
- All the buildings, including the one bought on 1.12.2018, are used for Suresh's business; the new building is used from the day it was bought, so it is used for 121 days in 2018-19 (1 December 2018 to 31 March 2019).
- The block is buildings at 10%. The result if the new building was not put to use in the year is given at the end.
Written down value of the block
The block's written down value is its opening value, increased by the cost of assets acquired in the year and reduced by the moneys payable for assets sold, the reduction not going below nil (section 43(6)(c)). The transfer expenses are not deducted here: they count only where a capital gain arises under section 50.
| Particulars | ₹ |
|---|---|
| Written down value of the block on 1.4.2018 | 15,00,000 |
| Add: building bought on 1.12.2018 | 25,00,000 |
| Total | 40,00,000 |
| Less: sale price of the old building sold on 1.3.2019 | 18,00,000 |
| Written down value of the block, 31.3.2019, before depreciation | 22,00,000 |
An asset acquired in the year and used for less than 180 days in it gets only half the normal depreciation (second proviso to section 32(1)). The sale price of ₹18,00,000 is more than the opening ₹15,00,000, so the whole ₹22,00,000 left in the block comes from the new building, which was used for only 121 days.
| Particulars | ₹ |
|---|---|
| Part of the block from the opening value (15,00,000 − 15,00,000 of the sale price) | Nil |
| Part from the new building (25,00,000 − the other 3,00,000 of the sale price) | 22,00,000 |
| Depreciation at 5% (half of 10%) on 22,00,000 | 1,10,000 |
| Allowable depreciation | 1,10,000 |
| Written down value carried to 1.4.2019 (22,00,000 − 1,10,000) | 20,90,000 |
A short-term capital gain arises on a depreciable block only where the sale price exceeds the opening value plus the cost of assets acquired in the year and the transfer expenses (section 50(1)), or where the block ceases to exist because every asset in it is sold (section 50(2)). Here ₹18,00,000 is less than ₹15,00,000 + ₹25,00,000 + ₹20,000 = ₹40,20,000, and the block still has the new building and one old building. So no capital gain is taxable; the transfer expenses of ₹20,000 bring no deduction this year.
If the new building was not used in the year
Depreciation is allowed only on assets used for the business. If the new building was not put to use in 2018-19, the whole block value left after the sale (₹22,00,000) would belong to it, and no depreciation would be allowed for the year; there would still be no capital gain.
Where the 4 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Written down value of the block | 1.5 |
| 2 | Depreciation at half rate on the new building | 1.5 |
| 3 | No capital gain under section 50 | 1 |
| Total | 4 |
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